Bruising Blackout: A Prelude?

As DirecTV, Viacom Settle Dispute, Contract Talks Loom for Both Fox and CBS

By

Shalini Ramachandran And

John Jannarone

Updated July 20, 2012 7:47 p.m. ET

DirecTV
ended its nine-day blackout of
Viacom
Inc.
channels early Friday morning, but the prospect of more blackouts looms as Fox and CBS are soon to renegotiate their own distribution agreements.

And a central issue in the Viacom-DirecTV dispute—the availability of Viacom shows on the Web and its impact on TV viewership—could recur even more intensely in those negotiations, industry executives said. Both Fox and CBS put many of their shows online.

Both Viacom and DirecTV emerged somewhat bruised by their clash, with Viacom's channels suffering ratings declines during the dispute and DirecTV losing some subscribers. Each company claimed satisfaction with the final outcome, however, which was reached after an all-night negotiating session.

Earlier

Precise financial details of the seven-year agreement weren't disclosed. But people familiar with the situation said Viacom won an increase of more than 20% in the fees paid by DirecTV, which previously had totaled around $500 million annually, lifting the amount to above $600 million.

DirecTV earlier had said that Viacom was asking for a 30% increase in fees, though Viacom said its existing agreement paid it below-market rates and it was just asking for a fair deal. DirecTV will now pay roughly what Viacom receives from other big distributors, said people familiar with the deal. Viacom owns MTV, Nickelodeon and Comedy Central.

"They recognized that we were not going to blink," said
Derek Chang,
executive vice president of content strategy and development for DirecTV. "At the end of the day, we feel comfortable with the deal we did because it reflects a fairness in terms of what the market rates are," he added.

"We are satisfied with all aspects of the deal," a Viacom spokesman said. In an internal memo, Viacom Chief Executive
Philippe Dauman
said "even the strongest partnerships occasionally hit rough patches…it is important that our distribution agreements reflect the value of our content."

One investor in both Viacom and DirecTV noted that Viacom "got a decent bump and it'll be fine, but it takes some of the wind out of the sails of programmers." He added that "it shows that ratings matter," a reference to the steep ratings declines that Viacom's best-known channels, particularly Nickelodeon, had suffered in recent months, which became a central issue in the dispute. The "days of automatic increases above market" cannot be "counted on," the investor said.

Viacom shares, after initially rising on the news, were down 24 cents to $46.41 in 4 p.m. composite trading on the Nasdaq Stock Market, while DirecTV shares fell 62 cents to $48.33.

The dispute took on broader significance than the typical programmer-distributor fight, coming amid rising use of online video and growing worries that the increasing cost of pay TV will prompt consumers to disconnect. Analysts said it was a sign of how the landscape is shifting that some cable operators, longtime rivals of DirecTV, issued public statements supporting the satellite TV firm and said they wouldn't capitalize on the situation by ramping up marketing against DirecTV.

Increasingly, the availability of TV programs online will be an issue in future negotiations between distributors and content companies, pay-TV executives said. DirecTV cited it as a factor in this dispute. A similar issue also played a role in
Dish Network
Corp.'s
continuing blackout of
AMC Networks
Inc.
's channels, as past seasons of some AMC shows are available on outlets like
Netflix
.

Later this year, Fox network is due to renegotiate its distribution agreement with
Comcast
Corp.
, the biggest pay-TV distributor, according to people familiar with the matter.
CBS
Corp.'s
CBS will negotiate a new deal with DirecTV and with
Cablevision Systems
Corp.
, the ninth-biggest distributor, according to other people knowledgeable of the situation.

Because broadcast networks were historically free over the air, broadcasters have been more aggressive than cable channels in making their shows available online for free. Both CBS and Fox allow much of their programming to stream online for free, CBS via CBS.com and Fox via sites like Hulu.com. Comcast, Cablevision, Fox and CBS declined to comment.
News Corp.
,
which owns The Wall Street Journal, also owns Fox and partly owns Hulu.

"These online deals undercut the value of the content they are providing for us," said Dish Network chief programming negotiator
Dave Shull,
who foresees online video coming up in future negotiations.

"I'm hoping that they are getting the message that we are very serious about this position. I think whether it's on Hulu or whether it's streaming availability of the content elsewhere, it reduces the amount of money that we want to pay to the broadcasters or the other programmers."

Analysts said it remains an issue for Viacom, which has generated licensing revenue from some of the online deals even as the ratings falls have affected its advertising revenue.

"Viacom will have to be more judicious in making this content available on the Web," said
Craig Moffett,
an analyst with Sanford C. Bernstein.

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